Ashton v. Cameron County Water Improvement District No. One

298 U.S. 513, 56 S. Ct. 892, 80 L. Ed. 1309, 1936 U.S. LEXIS 951

Opinions

Mr. Justice McReynolds

delivered the opinion of the Court.

Respondent, a water improvement, district embracing 43,000 acres in Cameron County, Texas, was organized in 1914 under the laws of that State. Claiming to be insolvent and unable to meet its debts as they matured, it presented to the United States District Court, December 5, 1934, an Amended Petition with plan for adjusting its obligations—$800,000 six percent bonds. This proposed final settlement of these obligations through payment of 49.8 cents on.the dollar out of funds to be borrowed from the Reconstruction Finance Corporation at four percent.

The petition follows and seeks relief under the Act of Congress approved May 24, 1934, c. 345, §§ 78, 79 and 80, 48 Stat. 798; Title 11 U. S. C., §§ 301, 302 and 303

* It alleges that more than thirty percent of the bondholders had accepted the plan and ultimately more than two-thirds would do so. The prayer asks confirmation of the proposal and that non-assenting bondholders be required to accept it.

Owners of more than five percent of outstanding bonds-appeared, said there was no jurisdiction, denied the existence of insolvency, and asked that the petition be held insufficient.

The trial court dismissed the petition for lack of jurisdiction. It held—

The petitioner is a mere agency or instrumentality of the State, created for local exercise of her sovereign power—reclamation of arid land through irrigation. It owns no private property and carries on public business only. The bonds are contracts of the State, executed through this agency,, and secured by taxes levied upon local property. Congress lacks power to authorize a federal court to readjust obligations, as provided by the Act. Also, the allegations of fact are insufficient.

The Circuit Court of Appeals took the cause, considered the .points presented, and held that the allegations were adequate to show jurisdiction and to warrant introduction of evidence. Also that Congress had exercised the power “To establish . . . uniform Laws on the subject of Bankruptcies,” granted by § 8, cl. 4, Art. 1 of the Constitution.. Accordingly, it reversed the trial court and remanded the cause.

The Act of May 24, 1934 amended the Bankruptcy Act of July 1, 1898, c. 541, 30 Stat. 544, by adding Chapter IX (three sections, 78, 79, 80), captioned “Provisions for the Emergency Temporary Aid of Insolvent Public Debtors and to Preserve the Assets thereof and for other Related. Purposes.”

Section 78 asserts an emergency rendering imperative further exercise of the bankruptcy powers. Section 79 directs that “in addition to the jurisdiction exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, courts of bankruptcy shall exercise original jurisdiction in proceedings for the relief of debtors, as provided in this chapter.”

. Section 80—long and not free from ambiguities—in twelve paragraphs (a to 1) prescribes the mode and eonditions under which, when unable to pay its debts as they mature, “any municipality or other political subdivision of any State, including . . . any coúnty, city, borough, village, parish,, town, or township, unincorporated tax or special assessment district, and any school, drainage, irrigation, reclamation, levee, sewer, or paving, sanitary, port, improvement or other districts” may effect a readjustment. A brief outline of the salient provisions, with some quotations, will suffice for present purposes.

The petition for relief must be filed in the District Court and submit plan for readjustment, approved by creditors holding thirty percent , of the obligations to be affected; also complete list of creditors. If satisfied .that the petition is in good faith and follows the statute, the judge shall enter an approving order; otherwise, it must be dismissed. Creditors holding five percent of the indebtedness may appear in opposition.

“A plan of readjustment within the meaning of this chapter (1) shall include provisions modifying or altering the rights of creditors generally, or of any class of them, secured or- unsecured, either through the issuance of new securities of any character or otherwise; and (2) may contain such other provisions and agreements, not inconsistent with this chapter, as the parties may desire.”

Upon approval of the petition, creditors must be notified; if the plan is not seasonably accepted, extension may be granted, étc.

Hearings must be accorded. The judge, with its approval, “may direct the rejection of contracts of the taxing district executory in whole or .in part.” He may require the district to open its books; allow reasonable compensation; stay suits; enter an interlocutory decree declaring the, plan temporarily operative, etc. “But [he] shall.not, by any order.or decree, in the proceeding or otherwise, interfere with any of the political or governmental powers of the taxing district, or any of the property or revenues of the taxing district necessary in the opinion of the judge for essential governmental purposes, or any income-producing property, unless the plan of readjustment so provides.”

After hearing, the judge shall confirm the plan, if satisfied that it is fair, equitable, for the best interests of the creditors, does not unduly discriminate, complies with the statute, and has beén accepted by those holding two-thirds of the indebtedness. Also, that expenses incident to the readjustment have been provided for, that both plan and acceptance are in good faith and the district is authorized by law to take all necessary action.

. The provisions of the plan, after order of confirmation, shall bé binding .upon the district and all creditors,' secured or unsecured. Final decree shall discharge the district from all debts and liabilities dealt with by the plan, except as otherwise-provided.

“(k) Nothing contained in this chapter shall be construed to limit or impair the power of any. State to control, by legislation or otherwise, any political subdivision thereof in the exercise of its political or governmental powers, including expenditures therefor, and including the power to require the approval by any governmental agency of the State of the filing of any' petition hereunder and of any plan of readjustment, and whenever there shall exist or shall hereafter bé created under the law. of any State any agency of such State authorized to exercise supervision or control over the fiscal affairs of all or any political subdivisions thereof, and whenever such agency has assumed such supervision or control over any political subdivision, then no petition of such political subdivision may be received hereunder unless' accompanied by the written approval of such agency, and no plan of readjustment shall be put into temporary effect or finally confirmed without the written approvál of such agency of such plains.”

■ We need not- consider this Act in detail or undertake definitely to classify it. The evident intent was to authorize a federal court to require objecting creditors to accept an offer by a public corporation to compromise, scale down, or repudiate its indebtedness without the surrender of any property whatsoever. The Act has been assailed upon the ground that it is not in any proper sense a law on the subject of bankruptcies and therefore is beyond the power of Congress; also because it conflicts with the Fifth Amendment. Passing these, and other objections, we assume for this discussion that the enactment is adequately related- to the general “subject of. bankruptcies.” See Hanover National Bank v. Moyses, 186 U. S. 181; Continental Illinois N. B. & T. Co. v. C., R. I. & P. Ry. Co., 294 U. S. 648; Louisville Joint Stock Land Bank v. Radford, 295 U. S. 555.

The respondent was organized in 1914 as Cameron County Irrigation District No. One, to furnish water for irrigation and domestic uses; in 1919, it became the Cameron County Water Improvement District,No. One, all as authorized by statutes passed under § 52, Art. 3, Constitution of Texas, which permits creation of political divisions of the State, with power to sue and be sued, issue bonds,- levy and collect taxes. An amendment to the Constitution—§ 59a, Art. 16—(October 2, 1917) declares the conservation and development of all the natural resources of the State, including reclamation of lands and their preservation, are “public rights and duties.” Most of the bonds now in question were issued during 1914; the remainder in 1919.

By Act approved April 27, 1935, the Texas Legislature declared that municipalities, political subdivisions, taxing districts, &c., might proceed under the Act of Congress approved May 24, 1934.

It is plain enough that respondent is a political subdivision of the State, created for the local exercise of her sovereign powers, and that the right to borrow money is essential to its operations. Houck v. Little River Drainage District, 239 U. S. 254, 261-262; Perry v. United States, 294 U. S. 330. Its fiscal affairs are those of the State, not subject to control or interference by the National Government, unless the right so to do is definitely accorded by the Federal Constitution.

The pertinent doctrine, now firmly established, was stated through Mr. Chief Justice Chase in Texas v. White, 7 Wall. 700, 725.—

“We have already had occasion to remark at this term, that ‘the people of each State compose a State, having its own government, and endowed with all the functions essential to separate and independent existence/ and that ‘without the States in union, there could- be no such political body as the United States.’ Not only, therefore, can there be no loss of separate and independent autonomy to the States, through, their union under the Constitution, but it may be not unreasonably said that the preservation of the States, and the maintenance of their governments, are as much within the design and care of the Constitution as the preservation of the Union and the maintenance of the National government. The Constitution, in all its provisions, looks to an indestructible Union, composed of indestructible States.”

Collector v. Day, 11 Wall. 113, 125, 126—

“Such being the separate and independent condition of the .States in our complex system, as recognized- by the Constitution, and the existence of which is so indispensable, that, without them, the general government itself would disappear from the family of nations, it would seem to follow, as a reasonable, if not a necessary .consequence, that the means and instrumentalities employed for carrying on the operations of their governments, for preserving their existence, and fulfilling the high and responsible duties assigned to them in the. Constitution, should be left free and unimpaired; should not' be liable to be crippled, much less defeated by the taxing power of another government, which power acknowledges no limits but the will of the legislative body imposing the tax. And, more especially, those means and instrumentalities which are the creation, of their sovereign ahd reserved rights, one of which is the establishment' of the judicial department, and the appointment of officers to administer their laws. Without this powér, and the exercise of it, we risk nothing in saying that no one of the States under the form of government guaranteed by the Constitution could long preserve its existence.”

In Indian Motocycle Co. v. United States, 283 U. S. 570, 575, et seq., relevant cases are collected and the following conclusion announced—

“This principle is implied from the independence of the national and state governments within their respective spheres and from the provisions of the Constitution which look to the maintenance of the dual system.” Notwithstanding the broad grant of power “to lay and collect taxes,” opinions here plainly show that Congress could not levy any tax on the bonds issued by the respondent or upon income derived therefrom. So to do would be an unwarranted interference with fiscal matters of the State—essentials to her existence. Many opinions explain and support this view. In United States v. Railroad Co., 17 Wall. 322, 329, this court said—

“A municipal corporation like the city of Baltimore is a representative not only of the State, but is a portion of its governmental power. It is one of its creatures, made for a specific purpose, to exercise within a limited sphere the powers of the State. The State may withdraw these local powers of government at pleasure and may, through its legislature or other appointed channels, govern the local territory as it governs the State at large. It may enlarge or contract its powers or destroy its existence. As a portion of the State in the exercise of a limited portion of the powers of thte State, its revenues, like those of' the State, are not subject to taxation.”

See also Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, 586; 158 U. S. 601, 630.

The power “To establish . . . uniform Laws on the subject of Bankruptcies” can have no higher rank or importance in our scheme of government than the power “to lay and collect taxes.” Both are granted by the same section of the Constitution, and we find no reason for saying that one is impliedly limited by the necessity of preserving independence of the States, while the other is not. Accordingly, as application of the statutory provisions now, before us might materially restrict respondent’s control over its fiscal affairs, the trial court rightly declared them invalid.

If federal bankruptcy laws can be extended to respondent, why not to the State? If voluntary proceedings may be permitted, so may involuntary ones, subject of course to any inhibition of the Eleventh Amendment. In re Quarles, 158 U. S. 532, 535. If the State were proceeding under a statute like the present one, with terms broad enough to include her, apparently the problem would not be materially- different. Our special concern is with the existence of the power claimed—not merely the immediate outcome of what has already been attempted. And it is of the-first importance that due attention be given to the results which might be brought about by the exercise. of such a power in the future.

The especial purpose of all bankruptcy legislation is to interfere with the relations between the parties concerned—to change, modify or impair the obligation of their contracts. The statute before- us expresses this design in plain terms. It undertakes to extend the supposed power of the Federal Government incident to bankruptcy over any embarrassed district which may apply to the court. See Perry v. United States, 294 U. S. 330, 353.

If obligations of States or their political subdivisions may be subjected to the interference here attempted, they are no longer free to manage their own affairs; the will of Congress prevails over them; although inhibited, the right to tax might be less sinister. And really the sovereignty of the State, so often declared necessary to the federal system, does not exist. McCulloch v. Maryland, 4 Wheat. 316, 430. Farmers & Mechanics Bank v. Minnesota, 232 U. S. 516, 526.

The Constitution was careful to provide that “No State shall pass any Law impairing the Obligation of Contracts.” This, she may not do under the form of a. bankruptcy act or otherwise. Sturges v. Crowninshield, 4 Wheat. 122, 191. Nor do we think she can accomplish the same end by granting any permission necessary to enable Congress so to do.

Neither consent nor submission by the States can enlarge the powers of Congress; none can exist except those which are granted. United States v. Butler, decided January 6, 1936, 297 U. S. 1. The sovereignty of the State essential to its proper functioning under the Federal Constitution cannot be surrendered; it cannot be taken away by any form of legislation. See United States v. Constantine, 296 U. S. 287.

■Like any sovereignty, a State may voluntarily consent to be sued; may permit actions against her political subdivisions to enforce their obligations. Such proceedings against these subdivisions have often been entertained in federal courts. But nothing in this tends to support the view that the Federal Government, acting under the' bankruptcy clause, may impose its will and impair state powers—pass laws inconsistent with the idea of sovereignty.

The power to regulate commerce is necessarily exclusive in certain fields and, to be successful, must prevail over obstructive regulations by the State. But,. as pointed out in Houston, E. & W. T. Ry. v. United States, 234 U. S. 342, 353, “This is not to say that Congress possesses the authority to regulate the internal commerce of a state, as such, but that it does possess the power to foster and protect interstate commerce.” No similar situation is before us.

The difficulties arising out of our dual form of government, and the opportunities for differing opinions concerning the relative rights of State and National Governments are many; but for a very long time this court has stéadfastly adhered to the doctrine that the taxing power of Congress does not extend to the States or their political subdivisions. The same basic reasoning which leads to that conclusion, we think, requires like limitation upon the power which springs from the bankruptcy clause. United States v. Butler, supra.

The challenge to the validity of the statute must be sustained. The judgment of the Circuit Court of Appeals is reversed. The cause will be returned to the District Court for further action, consistent with this opinion.

Reversed.

Originally, this was limited to two years. By Act approved April 10, 1936, it was extendéd to January 1, 1940, c. 186, 49 Stat. 1198.